www.hudclips.org U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER May 1, 1997 MORTGAGEE LETTER 97-17 MEMORANDUM FOR: ALL APPROVED MORTGAGEES ATTENTION: SINGLE FAMILY SERVICING MANAGERS SUBJECT: FHA Loss Mitigation - Clarification of Procedures This Mortgagee Letter is part of an ongoing series of letters which addresses FHA's loss mitigation procedures, preceded by; Mortgagee Letter 96-61 FHA Loss Mitigation Procedures-Special Instructions, Mortgagee Letter 96-32 Loss Mitigation-Mortgage Modification, Mortgagee Letter 96-25 Existing Alternatives to Foreclosure This letter will provide additional information and clarification related to the use of Special Forbearance, mortgage modification, pre-foreclosure sales and deeds-in-lieu of foreclosure. QUESTION: When must a lender begin to adhere to FHA's loss mitigation program. ANSWER: Requirements for FHA's program went into effect on November 12, 1996. QUESTION: Does FHA have step-by-step instructions as to how servicers should implement loss mitigation? ANSWER: FHA requires that lenders review the status of each defaulted loan in their portfolio on a monthly basis, and to document each month efforts to resolve the delinquency. All of FHA's loss mitigation tools must be considered throughout the delinquency cycle. FHA does not proscribe a step-by-step approach in the use of these tools. However, FHA will provide technical support to any lender who requests it by calling our loss mitigation team at 1-800-697-6967 or via the Internet at joe_mccloskey@hud.gov QUESTION: Must a Special Forbearance be in place prior to filing a partial claim. ANSWER: No, a partial claim may be used as a stand-alone tool. QUESTION: Under Special Forbearance, after a period of reduced or suspended payments, must a borrower make payments at a specific level above the original monthly mortgage obligation? ANSWER: No, FHA has eliminated specific criteria for repayment of the arrearage except that it cannot exceed 12 months PITI. QUESTION: If a borrower has been making partial payments under a Special Forbearance for a period of 12 months, but will not be able to make a full or increased payment what can I do to avoid foreclosure? ANSWER: If all necessary criteria are met, you may file a partial claim. QUESTION: On Pre-foreclosure Sales, if the property must sell for 95 percent of the "as is" appraised value, using the gross sales price, is there also a requirement that the property sell for 87 percent of the "as is" appraised value, using the net sales price? ANSWER: Servicers may use the gross sales price, provided that customary and usual fees are assessed for sales commission, transfer taxes, and other customary seller closing costs. Servicers should be advised that FHA will monitor pre-foreclosure sales activity, measuring such fee assessment using an 87 percent calculated "net" as a benchmark. This approach is designed to provide greater flexibility to lenders in the use of pre-foreclosure sales. However, FHA reserves the right to suspend a servicers option to file pre-foreclosure claims should any servicer be found charging excessive fees. QUESTION: What level of servicing activity does FHA expect under Special Forbearance? ANSWER: Lenders must comply with requirements in HUD Handbook 4330.1 Rev-5. In the case of Special Forbearance, delinquent installment payments due under a plan are to be addressed in the same manner as payments delinquent under the note. In addition, the Special Forbearance agreement may be modified due to changing borrower circumstances, and other loss mitigation approaches such as mortgage modification should be considered. QUESTION: When using a partial claim, Mortgagee Letter 96-61 states the lender is responsible for establishing a repayment plan. What type of payment plan is suggested? ANSWER: The Department has reconsidered this issue and will not require the mortgagee to establish a repayment plan. The amount advanced on behalf of the borrower and paid to the mortgagee as a partial claim will be secured by a subordinate lien requiring a balloon payment that is due: A. On the maturity date of the insured mortgage, or, when the first of the following events occur: Upon satisfaction of the first lien, B. When the maturity date of the primary note has been accelerated, or C. The Note and related, mortgage, deed of trust or similar Security Instrument are no longer insured by the Secretary, or D. The property is not occupied by the purchaser as his or her principal residence. QUESTION: What document should I use to record the partial claim? ANSWER: Suggested model forms for the subordinate mort-mortgage and subordinate note are attached. A suggested format for a promissory note to be used only for partial claims filed for Texas properties is also attached. The servicing lender will have to make any amendments to the security instrument which are required by State and local laws. See attachments. Additional clarifications such as the questions and answers provided above will be published in forthcoming Mortgagee Letters. For clarifications on any loss mitigation issue, lenders may contact our loss mitigation team at 1-800-697-6967, or write to us via the Internet at joe_mccloskey@hud.gov Sincerely yours, Nicolas P. Retsinas Assistant Secretary for Housing- Federal Housing Commissioner Attachments 1. Subordinate Mortgage 2. Subordinate Note 3. Partial Claims Promissory Note (Texas Only)